August 2, 2019
New research by Los Angeles-based CBRE shows multifamily turnover, the percentage of total rented units not renewed each year, fell to 47.5% in 2018, its lowest level in at least two decades. The trailing four-quarter rate for major REITs, declined to 50.1% in Q1 from 51.8% a year earlier.
CBRE’s Jeanette I. Rice, Americas Head of Multifamily Research, wrote, “Lower turnover rates are generally interpreted as positive for the industry and a sign of favorable market strength at this point in the cycle. Turnover rates vary considerably by metro. Higher rates are typically found in the South and West.”
The six major multifamily REITs provide further evidence of this trend, notes CBRE. Five recorded lower turnover rates in Q1 2019 than the prior year. For AvalonBay, Camden, Equity Residential, MAA and UDR, the average annualized Q1 rate fell by two percentage points to 42%. Essex was the exception with a 1-point rise to 41.0%.
Rice points out the benefits of lower turnover rates generally outweigh disadvantages. Turnover hurts a property due to loss of rent while the unit is vacant, possible rent concessions needed to re-lease the unit, and “make-ready” expenses. On the other hand, higher turnover can be advantageous during periods where the market (or product segment) is achieving better-than-average rent growth.
More recently, rent gains have moderated, so high occupancy is one major driver of lower turnover now, notes CBRE. Through the 2010s, turnover decline has also come from the aging of apartment residents, mainly as a result of younger individuals staying in multifamily housing for longer periods, and new older Americans coming into the rental market. Additionally, older residents tend to move less often than younger ones, points out Rice. “The recent turnover decline, concurrent with the large amount of new multifamily supply each year, is a sign of market strength,” wrote Rice.
Residents vacate apartments at much lower rates in the fall and winter months. The highest levels of turnover typically occur in Q2 and Q3. For multifamily REITs, Q1 has the lowest turnover and Q3 the highest almost every year, reports CBRE.
Among 50 metros analyzed, Milwaukee and Northern New Jersey tied for the lowest 2018 turnover rate of 38.1%, followed by Providence (38.7%), Miami (39.4%), St. Louis (40.5%), Philadelphia (41.1%), Cleveland (41.2%), New York (41.4%) and Minneapolis (42.8%).
Salt Lake City and San Antonio had the highest turnover rates at 53.7% and 53.6%, respectively. Other metros with high turnover included San Diego, Charlotte and Phoenix.
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